BREAK EVEN ANALYSIS

Document Sample
BREAK EVEN ANALYSIS Powered By Docstoc
					 BREAK EVEN ANALYSIS
• Any business wants to make a
  profit on their investment of time
  and money
• It is also a useful planning tool
• Breakeven point is the point at
  which the net profit on the income
  statement equals zero.
 Calculating Breakeven
Three methods
• 1. cost-volume-profit
     analysis
• 2. contribution analysis
• 3. sensitivity analysis
Cost –volume - profit analysis:
Three key parts are:
• fixed costs (operating expenses)
• volume (break-even point in units)
• profit (selling price minus
          variable cost per unit.)
    Contribution Analysis
• Calculating breakeven requires
  determining how many
  contributions (selling price per
  unit minus variable costs per
  unit) are necessary to cover, or
  pay for, the product’s expected
  annualized operating costs (fixed
  costs)
  Sensitivity Analysis
• Marketing manager changes one
  of the input variables to see what
  difference the change makes o
  break even volume
• It shows how sensitive break
  even is to changes in the
  numbers used to calculate it.
      Breakeven Point
• When sales equals expenses / costs
• Costs are either fixed or variable
• Variable costs tend to vary directly
  with the number of units made / sold
• Fixed costs tend to be relatively
  constant no matter how many units
  are made / sold
   Unit Contribution
• Unit contribution is the amount of
  money remaining after the variable
  costs of producing or purchasing
  one unit is subtracted from the
  selling price of one unit:

Selling price per unit – variable costs
 per unit = unit contribution
      Total Contribution
• Total contribution is determined
  by multiplying unit contributions
  times the number of units sold.
Unit contribution X Number of units
  sold = Total contribution
• For retailers, unit contributions is
  also referred to as markup or gross
  margin.
              Formula

Break even     Totals fixed costs
Point      =
(in units)   selling price/ - variable cost
               unit           unit
             Markups
• Markup is the difference between the
  cost and the desired selling price of
  goods.
• Should cover the expense of operating
  the business plus a desired profit
• Retail (selling) price - cost = markup
                Example
•   Cost of merchandise is $75,000
•   The Operating expenses is $15,000
•   Desired profit is $10,000
•   Therefore sales must be $100,000
•   Sales    100,000
•   COGS      75,000
•   Markup     25,000
•   Expenses 15,000
•   Profit     10,000
        Initial Markup
• A pair of slacks that cost $50 is
  offered for sales at $100. What is the
  markup?

• Retail Price – cost = markup
• $100 - $50.00 = $50.00
       Markup Percentage
Markup is usually calculated as a percentage

Markup = markup percent based on retail
Retail

Markup = markup percent based on cost
Cost
         Markdowns
•  Markdowns are a reduction in selling
   price
Reasons –
1. High selling prices
2. Errors in buying
3. Errors in selling
4. Other markdowns reasons –eg.
   season
         Markdowns
• Markdowns are losses in selling
  price, so the smaller the markdown
  the less the loss
• Markdowns attract customers but
  should occur early in the season
• Deep markdowns occur only when
  necessary and losses will be large
   Markdown Calculation
Dollar Markdown

1. Calculate the dollar markdown

Original retail X reduction Percent =
                   Dollar markdown
2. Calculate the amount of the sales
   Original retail - $ markdown = sales
                             (new retail)

3. Calculate the Markdown percent
   based on sales

4. Markdown % = Dollar markdown
                Amount sold
            Example
• A furniture buyer ran a sale on
  kitchen furniture. The goods had an
  original retail price of $10,000 and
  were reduced for the event by $15%.
  All the goods were sold. Calculate
  the markdown percent based on
  sales.
                 Answer
1. Original price X reduction % = Markdown
    dollars
   $10,000 x 15% = $1,500
2. Calculate the amount of the sales
   Org. Retail – dollar Markdown = sales
   $10,000 - $1,500 = $8,500
3. Calculate markdown %
4. Markdown% = Dollar markdown
                    Amount sold
                   =$1,500 = 17.6%
                     $8,500

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:25
posted:2/4/2012
language:
pages:19